What About The Correction?

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

Over the holidays, I spent a lot of time with some family members that I don’t often get to see. We got together, had a little too much to eat and drink, and gave each other updates on what’s happening in our lives. Between the updates on kids, new careers, and new houses (no new spouses or kids this year), we never miss the opportunity to get some free advice from one another.

My two sisters are both in healthcare and handle all questions related to our aches and pains. My cousin the mechanic will venture out to the driveway and listen to the ping in your engine for the cost of getting him a beer. You get the idea.

My contribution is on the investment side, fielding questions about 529 plans, IRA distributions, 401(k) plans, etc. But the biggest question is always some version of “where is the market going?” This year’s edition, fueled by the huge returns in stocks in 2013 (and a good dose of CNBC), was “do you think we’re going to get a market correction?”

Hello, My Name is Free AdviceI suggested that when you look at how far the market has run and the high levels of investor sentiment right now—indicating that a lot of good news is priced into the market— I could easily see the market pulling back 5-10% on some unexpected bad news. The natural response from my family was, “What should I do?” “Nothing,” was my presumably blunt response.

My rationale is this: From a fundamental standpoint, the market looks good. Companies continue to grow earnings at a steady, albeit slow, rate. The market isn’t cheap, but it isn’t expensive either, and rarely does P/E compress without a recession. Speaking of the r-word, GDP growth continues to be sluggish, but it’s positive and expected to increase in 2014. Housing, the root cause of the last recession, continues to improve in spite of rising rates. And the Fed launched the previously-dreaded tapering of its quantitative easing without any market hiccup.

Depending on the attention span of my audience, all of that might boil down to simply saying, “We could get a correction, but if you’ve got at least 6-12 months, I think the market will be positive from here.”

Now, let’s go check out that leak on my car…

Show and Tell: Five Points to Make with Prospects

Sue Bergin@SueBergin

The best storytellers are the ones that have mastered the art of “show, don’t tell.” Their ghost stories, for example, have descriptions of settings and physical manifestations of emotions. Sentences like “it was a scary place,” serve only to punctuate what the reader or listener already concluded.

The same can be said of advisors. Telling someone that you can help them achieve their financial goals does not make nearly as big of an impact as when you show them how.

The following are five areas where it is important to show clients why you are the best choice.

Five Points to Make with Prospects:

  1. How you will organize their financial lives. While most clients don’t come out and admit it, their financial lives are chaotic. They may not know how many assets they truly have and how they can put them all to work to increase purchasing power. The first step for advisors is to show clients the before and after. Explain to them what they currently have now versus what their potential growth may look like. Demonstrate how you will make them feel more in control of their financial lives. It could be something as simple as taking out your iPad and showing them the client portal of wealth management tools.
  2. 6.11.13_Bergin_Show&TellHow you will help them make good investment decisions. The term “good investment decisions” is too opaque to resonate with clients. Instead, walk clients through the process used to create an Investment Policy Statement (IPS). Talk to the client about how an IPS helps to guide future decisions. In the recent Brinker Barometer, we learned that 72% of advisors use a written IPS to help clients make non-emotional investment decisions when the market is in flux. The IPS is tangible proof of a disciplined process that will benefit the client.
  3. What you do to ensure that clients get the best advice and service possible. Marketing-darling phrases like independent, objective and unbiased, fall flat. Instead, describe the process that you go through to ensure that your recommendations are appropriate for the need you are trying to solve.
  4. You have been there, done that. Your experience does not speak for itself. You have to give it a voice. If you just say, “I have been an advisor 22 years,” you miss the opportunity to highlight what you have seen throughout your career. It is more impressive to learn that you have helped others thrive in all market climates than to know that you’ve been at this for a while.
  5. You appreciate their business. It’s easy to say “I value your business,” but to convey that message through action takes a concerted effort. Personal touches such as the just-checking-in phone calls, handwritten notes, and occasional invitations to social events let clients know that their business and their well-being matter to you.

Reading The Fine Print – Part Two

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

In part one of my blog post, I discussed how important it is to read the fine print when selecting the right managers. “Things are not always what they seem, and by doing a little bit of digging, you can unearth some red flags that hopefully help you make a more educated decision, or at least ask the right questions.”

I left you with three warning signs of sorts that I’ve run into throughout my years of selecting investment managers:

  • Backtested numbers
    When you take a particular portfolio, or a process, and ask, “How would this have performed over a certain time period?”—that’s backtesting. There’s merit in doing this, but you really have to be careful on the value you place on the data. Anyone can build a portfolio that looks great using backtested data. If it’s a portfolio of mutual funds, just pick the ones that did the best. If it’s a quantitative model or a tactical model, just pick the algorithm that worked the best. You’ll never see a backtested quantitative or tactical model that doesn’t have a good outcome in recent markets.Not surprisingly, I have yet to come across a quantitative or tactical portfolio that has performed in actuality as well as it performed in backtesting. A backtest is good for telling you how the strategy would perform in various markets to help develop your expectation levels, but should not be used to decide if the strategy adds value.
  • Seed Accounts
    4.26.13_Raupp_FinePrint_2Firms will often start seed or model accounts to get a track record of performance started. These typically have little or no client assets and are often funded entirely by firm assets. While the firm can make the claim that they’ve been running money that way for a number of years, the reality was that their clients didn’t experience the front end of that.There are a few risks in play here. The firm could have run multiple seed accounts, discarding the ones that didn’t work and promoting the one that did. The objective itself or the universe of eligible securities may have changed before the strategy was offered to clients. As with backtested numbers, there is value in looking at seed performance, but if the backbone of a strategy’s pitch is great performance in 2008 and there were minimal assets that benefited, you have to ask, “Why?” Would the firm make the same decisions with billions of client assets that they did with $100,000 of seed capital?
  • Merged Track Records
    When firms combine, or merge products, often from multiple track records comes one track record. Ideally, the track record from the product that was most reflective of the surviving product would be used, but, more likely, the best track record will be the one that wins out. Knowing whether the track record is reflective of the current team, process and philosophy is vital.

Whenever you look at the performance of an investment strategy, you should always give careful consideration of exactly what you’re looking at. Reading through the disclosure is a necessity, as is asking questions about things that are unclear. The fine print can often help you make more educated decisions of where to invest.

Reading The Fine Print – Part One

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

While at a carnival a few months back, our ten-year-old daughter entered my wife into a “contest” to win a free ocean cruise, unbeknownst to us. A few weeks and many soliciting phone calls later, we realized we had an opportunity for a teaching point on reading the fine print. While the picture on the entry box for the contest certainly looked appealing, with a handsome couple sunbathing by clear, blue Caribbean waters, the reality was that “winning” the contest gave you one free cruise—while accompanied by another adult paying full price, meals and transportation to point of departure not included, other fees may apply. And, if that wasn’t the kicker enough, your entry meant that you agreed to be solicited by the sponsoring firm. Oh, and you had to sit through a presentation while on the cruise.

The lesson? Often when something seems too good to be true, it is. Before buying/entering/joining something, make sure that you know what you’re getting into. In other words, read the fine print!4.26.13_Raupp_FinePrint

This is advice I’ve found extremely valuable in the investment management industry when selecting investment managers. Things are not always what they seem, and by doing a little bit of digging, you can unearth some red flags that hopefully help you make a more educated decision, or at least ask the right questions. Disclosures, often ignored, are invaluable when analyzing the performance of a strategy you’re considering.

Here are a few situations I’ve run into:

  • Backtested Numbers
  • Seed Accounts
  • Merged Track Records

Look out for my second post next week as I go deeper into these scenarios!

Accessibility Outweighs Investment Advice as Barometer of Trust by Sue Bergin

According to a recent survey, clients are more forgiving of bad investment advice from their advisor than they are of poor communication skills.

The findings were drawn from the John Hancock Trust Survey™, which polled mass affluent investors (household income of at least $100,000, investable assets of at least $200,000) in mid-April 2012.

Twenty-five percent of the survey respondents indicated that inaccessibility and unresponsiveness as the top reason for lack of trust in a financial advisor. Coming in a distant second, at 13%, was poor investment advice. The third most prevalent reason for losing trust in a financial advisor was the lack of a personalized approach.

While it is helpful to know that the quickest way to lose trust is to dodge calls, delete e-mails without responding, and ignore client text messages, it is also useful to know what you can do to build trust.

According to the survey, trust is most inspired by the following factors:

• Clear explanations of investment recommendations (54%)
• Knowledge and timeliness about products and trends (54%)
• Fee disclosure (51%)
• Responsiveness (49%)

Somewhat surprisingly, the following factors ranked relatively low in terms of the number of respondents who felt they were important in building trust in an advisor:

• Recommendation by family or friend (21%)
• User-friendly tools and calculators (16%)
• Informative website (11%)
• Community involvement (5%)

The results point to the importance of blending both expertise and communication. Clients want to work with advisors who understand and can explain sophisticated financial concepts, and who are accessible when needed and as needed.